How not to catch a cold in the American sun
Wednesday 27th July 2011
The temperatures are high, the prices low and the language kinda familiar: what’s not to like, as they say in the Sunshine States? The answer lies in the complex web of tax and reporting requirements for foreigners buying an American property.
Buying and Selling
If you are buying the property from a non-American, you may need to withhold 30% of the funds as tax and pay it to the IRS on behalf of the seller – and you will face the same stricture, as and when you sell, if you are not American.
As seller, there are circumstances in which you can apply for a reduction in the withholding amount, most relevantly where you can show your maximum liability is below the 30% requirement – if you know you will make a loss on the sale, for example. But the application must be started before completion because the IRS will require the buyer to pay the withholding within a time limit.
Either way, you will need to apply for an Individual Taxpayer Identification Number (ITIN), which can be a lengthy process so, again, you will need to start in good time.
Renting out the Property
You will also need an ITIN if you rent out the property, and you may have to file non-resident Federal and State tax returns – though if you buy in Florida there are no state income tax requirements. In addition, you will need to report the income on your UK tax return and claim a credit for any US and state taxes paid.
In both the UK and US, rental expenses – items such as mortgage interest, utilities and repairs – reduce the taxable amount. In the US, moreover, you can claim depreciation as an expense: an annual deduction based on the price of the building, separate from the land, as well as capital improvements and some furnishings. The depreciation claimed reduces the cost basis of the property when sold, making the final gain larger.
Personal Use
Your property is considered a “home” if you reserve it for personal use for more than the greater of 14 days or 10% of the total number of days it is rented out at a fair price.
If your personal usage satisfies this test, the deductible expenses will be pro-rated when calculating rental profit.
If the property is rented for less than 15 days during the calendar, you do not usually have to report the income – though some state rules may differ on this.
Estate Tax Issues
US real estate is subject to US Estate Tax – though you can claim a $60,000 exemption as a foreigner. While you can offset what you pay against UK inheritance tax, there may also be state-specific estate taxes which will vary across the country. For larger properties, it may be worth planning to avoid liability by transferring ownership to a limited liability company, or similar.
As you can see, there is much to ponder before you buy your place in the American sun. Good, early advice is essential – so please feel free to contact Buzzacott Expatriate Tax Services or your usual Buzzacott contact to discuss your plans.
Fiona Pearce